A taxonomy of climate accounting principles for financial portfolios

Abstract

Climate accounting for financial portfolios has seen growing prominence in the past years, thanks to both private and public sector initiatives. Over 200 financial institutions have conducted some form of portfolio analysis. In the context of this growing prominence, the academic and practitioner's discussion of climate accounting has largely focused on questions of climate data quality and choices for estimation models. Missing in this debate is an analysis of the underlying accounting principles related to climate data. There is no overview of the climate accounting principles and the implications of choosing different principles and rules. This article provides a taxonomy of key accounting choices currently applied for climate accounting of financial portfolios, notably regarding units of accounting, boundaries of accounting, normalization rules, and allocation rules. Based on a review of data providers accounting approaches in practice, as well as sample applications of different accounting principles, it distills key accounting categories and highlights the potential sensitivity of the ultimate results to these choices. The article concludes that climate assessments of portfolios may be equally sensitive to accounting choices as to the quality of underlying data, suggesting more attention and standards are needed.